Employee vs. Contractor: What Small Business Owners Should Know
A plain-English overview of W-2 employees, 1099 contractors, classification factors, payroll differences, and why owners should get professional guidance.
This resource is educational and is not legal or tax advice. Consult a qualified professional for worker classification decisions.
Short answer
Employees and contractors are treated differently for payroll, tax reporting, control, tools, schedule, training, and independence. Classification decisions can create compliance issues, so get professional guidance.
Checklist
- Review who controls the work and schedule.
- Review who provides tools and training.
- Review whether the worker operates independently.
- Understand payroll tax and reporting differences.
- Ask a CPA, payroll provider, or attorney before making close calls.
Common mistakes
- Calling someone a contractor only because it is cheaper.
- Ignoring control, schedule, tools, and training factors.
- Mixing contractor payments into payroll expense.
- Waiting until year-end to collect vendor information.
Examples for service businesses
- A contractor using subcontractors should track vendor payments separately from employee wages.
- A landscaping company with regular crew members should review classification carefully.
- A service business should separate 1099 contractor costs from W-2 payroll costs in reports.
Why classification affects bookkeeping
Employees create payroll records and payroll liabilities. Contractors usually create vendor payments and 1099 reporting questions. Mixing them makes reports harder to trust.
Request a Bookkeeping Review
If payroll and contractor payments are mixed together in your books, request a bookkeeping review.
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